The Department of Education (the “Department”) has formally sought comment on the legal standards used to evaluate whether a borrower has established “undue hardship” to discharge his or her student loans in a bankruptcy proceeding. The Department published this request for information in the Federal Register last Wednesday and responses to the request for will be taken through May 22, 2018.
The federal Bankruptcy Code (the “Code”) allows student loans to be discharged in bankruptcy only where necessary to avoid “undue hardship” on the borrower and his or her dependents. 11 U.S.C. § 523(a)(8). Congress has declined to define undue hardship in the Code, including in its most recent amendment, which was implemented through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (colloquially known as “BAPCPA”). Congress also chose not to authorize the Department to define the term through regulation, therefore creating a landscape where courts have developed the legal standard of undue hardship through case law.
Courts have created two tests to determine whether a borrower has established undue hardship, permitting discharge of the borrower’s student loans in bankruptcy: the Brunner test and the “totality of the circumstances” test. The Brunner test, originally set forth in Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987), requires that the borrower establish three elements: (1) the borrower is unable to maintain a minimal standard of living for both the borrower and dependents if he or she must repay the loans; (2) there are additional circumstances indicating the current state of affairs will persist for a significant part of the loans’ repayment period; and (3) the borrower has made good faith efforts to repay the loans. Id. at 396. The “totality of the circumstances test,” on the other hand, differs from in the rigid prongs of Brunner and considers three factors: (1) the debtor’s present, past, and future financial resources; (2) the calculation of the reasonably necessary living expenses of the borrower and his or her dependents; and (3) any relevant facts or circumstances of the case. Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir. 1981).
The Department’s regulations require both guarantors and educational institutions that participate in the Federal Perkins Loan Program (“FPLP”) and Federal Family Education Loan Program (“FFELP”) to assess claims of undue hardship and determine if repayment would qualify as such. The Department issued guidance in 2015, providing a two-step analysis for these loan holders to determine the presence of undue hardship. The Department’s guidance provided that the loan holders should first determine if repayment would constitute undue hardship then, if not, it should evaluate the costs of litigating the issue. If the cost to litigate the issue in bankruptcy court is estimated to eclipse one-third of the student loan balance, the loan holder is then authorized to accept a claim of undue hardship.
The Department now requests information on several aspects of the determination of undue hardship. First, the Department seeks public comment on which factors must be used in evaluating claims of undue hardship made by student loan borrowers in adversary proceedings brought in bankruptcy cases. It also requests comment on how much weight should be given to each factor and whether the use of two different tests—Brunner and “totality of the circumstances”—results in inequities across borrowers seeking discharge in bankruptcy due to the undue hardship imposed by repayment. Finally, the Department requests information on how these issues, and other considerations, should affect whether a loan holder should concede a borrower’s undue hardship claim.